5/02/2008 @ 6:40AM

Bully For Obama

I get the sense, talking to investors, that a lot of you are terrified of what an Obama presidency would do to your portfolio. You shouldn’t be. Election outcomes don’t affect markets the way you expect them to. We have a long history of elections and S&P 500 returns, and the pattern is pretty clear. First, years in which Democrats capture the White House are usually bullish years for the stock market. Second, inaugural years following a Democratic win in November are better than Republican inaugural years. There is a reason for this pattern. The market expects the worst of a Democratic President and then discovers that he’s not so bad for investors. It tends to rebound after the initial premonitions that a Democrat will win. On the other hand, Wall Street expects the most of a Republican and is disillusioned after the election.

The average performance for years with Democrats elected is dragged down by two exceptional years. One was 1932, as FDR won and the Great Depression bottomed. The S&P slipped 8.9% that year (including dividends). The other year was 1940, another FDR win, this time with war under way in Europe. The market was off 10%. Take away those two bad years and you find that election years with Democrats winning have always been positive for the market.

If we elect Obama and history’s pattern prevails, expect 2008 to be positive but below average and 2009 to be above average. If we elect McCain, 2008 won’t be so bad, but 2009 will be a disappointment. Republican inaugural years (there have been ten since 1925) have delivered an average 0.5% loss for the market. Only three Republican inaugural years were positive; seven were negative. Loser years include the first years in both of Eisenhower’s and Nixon’s two terms and in Reagan’s first term, George W. Bush’s first term and, of course, Hoover’s single term.

In inaugural years we discover that Democratic presidents are phonies and never meant most of what they said in their populist, anticapitalist campaigns. They could never get reelected if they really delivered on their campaign promises. Inaugural years for Republican presidents remind us that they are phonies, too; they don’t do much for the economy or for investors. We get disappointed and pummel stock prices.

The three-month period ending in January gave us the first big global market correction since 1998. Investors and the media still fear their own shadows. Stocks should rise regardless of who winds up in the White House. Here are some megacap stocks of the sort I have been favoring for 2008.

Banco Bilbao Vizcaya(22, BBV), with a market cap of $85 billion, is among the few big banks still positioned for growth. It has 45% of its profits coming from emerging Hispanic-American markets and a tiny U.S. exposure, with an appetite to grow in America via acquisition. This full-service bank with headquarters in Spain deserves to sell at much more than eight times earnings. It has a 4.8% dividend yield.

The Swiss firm
Novartis
(49, NVS) has branded and generic pharmaceuticals, vaccines and diagnostic tools. It also has a long line of nonprescription drugs like Bufferin, Excedrin, Desenex and Maalox. It just bought 25% of eye-care leader
Alcon
, with a right to buy control. At 12 times 2008 earnings this $111 billion (market value) growth company has lots of upside potential. The dividend is 3%.

Daimler’s acquisition and sale of Chrysler was stupid. But now Daimler(78, DAI) returns to its Mercedes brand, the essence of quality. The high end of autos, like housing, is holding up better than the overall industry. You’re paying nine times estimated 2009 earnings. The $82 billion market value is 50% of sales. You get a 4% dividend.

The experts are telling us that lower oil prices lie ahead. I’m not so sanguine about that forecast, partly because I am bullish about the world’s economy and expect that demand for oil will be surprisingly strong. Hence I like
Royal Dutch Shell
, with a $239 billion market value. The company is comparable to
ExxonMobil
, but its A shares (76, RDS.A), and B shares (75, RDS.B)–which are virtually identical for an American investor–are cheaper than Exxon shares at eight times likely 2008 earnings and 70% of annual sales. The A shares yield 3.7%, the B shares 3.8%.

A smaller and more speculative investment is
Sara Lee
(13, SLE). This poorly managed and slowly melting block of ice has great brand names. Even in a cooled-down takeover market it seems to me a likely target. It sells at 14 times likely 2008 earnings and 80% of sales. Market capitalization is $9.8 billon, yield 3%.

Money manager Ken Fisher’slatest book is The Only Three Questions That Count (John Wiley, 2007). Visit his homepage at www.forbes.com/fisher.